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Negotiable Instruments

Prepared by

Advocate N.K. Maharjan

(Assistant Prof. People’s Campus )
(M.A., M.P.A., LL.M., M.phil., Ph.d. in Law (in Progress)
Meaning & Definition of Negotiable Instruments

• The word negotiable means ‘transferable by delivery’,

• The word instrument means ‘a written document by which a right is created
in favour of some person.’
• Negotiable instrument is ‘a document which can be legally transferred to
another party for money.’ Thus, negotiable instrument is a document which
is given to another person in exchange for money in the business field.
• A study of negotiable instrument is that how a piece of paper comes to be at
the centre of all commercial transactions.

• Definition of Negotiable Instruments

• Section 2 of Negotiable Instrument Act, 2034 defines “Promissory note and
bill of exchange are said to be negotiable instrument.”
• Section 13 of Indian Negotiable Instrument Act, 1881 states “a promissory
note, a bill of exchange or a cheque payable either to an order or to a
Doctrine of Negotiability
• Negotiable instrument must be transferable
• It must be given in good faith
• It must contain a right of action in itself

• Types of Negotiable Instruments

• Negotiable Instruments by Statute
• Negotiable Instruments by custom or usage

• Characteristics of Negotiable Instruments

• It must be written or printed form,
• There must be signed by drawer or maker,
• Unconditional promise or order for payment,
• There should not be mention except certain sum of money,
• Payment should be on time,
• Name and address must be clear,
• Payable to bearer like cash to payee,
Promissory Note
• ‘Promissory note is an instrument in writing containing an
unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.’

• Section 2 (f) of Nepalese Negotiable Instrument Act, 2034

defines, "Promissory Note" means an instrument in writing
except government or Bank note containing an unconditional
undertaking, signed by the maker, to pay a certain sum of
money to, or to the order of, a certain person, or to the bearer
of the instrument.
Characteristics of Promissory Note

• Promissory Note must be in writing

• It must contain a promise to pay

• The promise to pay the money should be unconditional

• The instrument must be payable in money and money only

• The parties to the instrument must be designated with reasonable


• Signed by the maker

Bill of Exchange

• A ‘bill of exchange’ is an instrument in writing containing an

unconditional order, signed by the maker, directing a certain person
to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.

• Different Classes of Bill of Exchange

• Inland and Foreign Bill
• Documentary Bills
• Usance or Time Bills:
• Accommodation Bills

• Parties of a Bill of Exchange

• Drawer
• Drawee
• Payee
Essential Elements of the Bill of Exchange

• It must be in writing
• It must contain an order to pay. The order to pay may be in
the form of a request, but it should be imperative
• The order to pay should be unconditional.
• The order must be to pay money and money only. The amount
ordered to be paid must be certain.
• It requires three parties.
• The person who makes the bill of exchange, called the
• The person to whom it is addressed called the drawee and
• The payee
• All these parties must be indicated with reasonable certainty.
• The bill must be signed by the drawer.
•Meaning of Cheque
– Cheque is a negotiable instrument governed by the provisions in the Negotiable
Instruments Act, 1881.
– It is an unconditional order, drawn on a specified banker, signed by the drawer,
directing the banker, to pay on demand, a certain sum of money only to or to the
order of a certain person or to the bearer of the instrument.
– Every bank has its own printed cheque forms which are supplied to the account
holders at the time of opening the accounts.

– A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand.
– A cheque being a bill of exchange must possess all the essentials of bill and
should also meet the requirements of section 6.

Essential Characteristics of Cheque:

• The following points arising out of the definition of a cheque

require consideration.
 Unconditional Order
 In Writing
 By One Person to Another
 Signed by Person Giving It
 Payable on Demand
 Sum Certain in Money
 Payable to Specified Person or Bearer
Types of Cheque

• Cheques are of the following types

Order Cheque
 Bearer Cheque
Blank Cheque
Open Cheque
Crossed Cheque
General Crossing
Special Crossing
Double Crossing
Traveller’s Cheque
Difference Between Bill of Exchange and Promissory Note
S. N. Bill of Exchange S. N. Promissory Note

1 A bill of exchange contains an order to 1 Promissory note contains a promise to

pay pay

2 The primary liability is that of the 2 The primary liability is that of the
drawee after he has accepted the bill; maker who signs the note.
the drawer’s liability is secondary.
3 A bill can be drawn payable to bearer, 3 A promissory note cannot be made
provided it is not payable on demand. payable to bearer.

4 Bills of exchange are sometimes drawn 4 In the case of promissory note, the
in sets; the position is not the same in necessity for acceptance does not arise
the case of promissory note. since the maker of the note is already
liable upon it.
5 It cannot be drawn conditionally, but it 5 A promissory note can never be
can be accepted conditionally with the conditional.
consent of the holder.
6 In the case of a bill of exchange, notice 6 These are unnecessary in respect of a
of dishonour, nothing and protesting are promissory note.
required to prove dishonor,
Difference Between Bill of Exchange and Cheque
S. N. Bill of Exchange S. N. Cheque

1 The drawee may be any person, 1 The drawee, i.e., the person on whom
the bill is drawn, must always be a
2 A bill cannot be drawn to bearer if it is 2 A cheque can be drawn to bearer and
made payable on demand, made payable on demand.

3 A notice of dishonor is usually 3 A notice of dishonor is not necessary

required, when a cheque on demand.

4 Presentation is sometimes required for 4 It is not necessary to present it for

acceptande, and it is always advisable acceptance.
to present it for acceptance even when
it is not essential to do so.
5 Bills must be stamped according to the 5 Cheques do not require to be stamped.
Comparison of Cheque, Bill of Exchange and Promissory Note
Points of Comparison Promissory Note Bill of Exchange Cheque

Parties to the instrument Two-Maker and Payee Three- Drawer, Drawee Three- Drawer, Drawee
and Payee and Payee
By whom drawn Any person Any person Customers of bank only

On whom drawn Any person Any person The bank

Nature of the instrument Unconditional order to Unconditional order to Unconditional order to

pay pay pay
Time when payable On demand or after a On demand or after a On demand
period of time period of time
Acceptance Not necessary Necessary Not necessary

Crossing Cannot be crossed Cannot be crossed Can be crossed

Grace days 3 days for usance 3 days for usance bills Not available. Always
promissory notes payable on demand.
Provisions relating to Not applicable Applicable Not applicable
acceptance for honour,
drawee in case of need,
Countermanding Not applicable Once accepted cannot be Can be countermanded
payment countermanded at any time before
Meaning of Holder
• A person is called holder of a negotiable instrument if he satisfies the
following two conditions:
a) He must be entitled to the possession of the instrument in his own
name; and
b) He must be entitled to receive/recover the amount due on the
instrument from the parties liable under the instrument,

Kinds of Holder
De jure holder
De facto holder
Holder’s Rights and Powers

• The following are the more important rights and powers of the holder of a
• Special Endorsement

• Crossings
• Where a cheque is uncrossed, the holder may cross it generally or
• where cheque is crossed generally, the holder may cross it specially; and
• where cheque is crossed generally or specially, the holder may add the
words ‘Not negotiable’.

• Duplicate of Cheque
• Where a cheque has been lost before it is overdue, the person who was the
holder of it has the right to apply to the drawer to give him another cheque
of the same sense; If, on request, the drawer refuses to give a duplicate
cheque, he may be compelled to do so.
• The holder has, however, no right to apply to an endorser to make a fresh
• Negotiation
• Usually, however, a holder has a right to negotiate a cheque to another person.
Furthermore, a holder sometimes has power to negotiate a cheque even though
he has no title or a defective title to it.

• For example, if a thief steals a cheque payable to bearer and negotiates it to

someone who gives values for it in good faith, that person will become the
holder in due course of the cheque, but he satisfies the other requirements of
Section 29 of the Bills of Exchange Act, 1882. In this instance, the thief, as
holder, had power to negotiate the cheque, even though he had no right to do so.

• Presentation
• If the holder of a cheque does not negotiate it to another person, he may present
it for payment to the bank on which it is drawn.
• If the cheque is an open one, he may present it personally to the drawee bank
and request payment in cash; but
• If the cheque is crossed, he cannot require the drawee bank to make payment in
cash, and he should, therefore, present it for payment through a bank.
• Notice of Dishonour
• When a Bill of Exchange is dishonoured by non-acceptance or
non-payment, the Holder thereof, or some party thereto who
remains liable thereon, must give notice to all other parties
related to such instrument, and if any party among them has
not been noticed, such party shall not be liable to that
• Provided that, nothing in this section renders it necessary to
give notice of dishonour to the maker of the Promissory Note,
acceptor of the Bill of Exchange or the Drawee.
• Right of Action
• It is one of the characteristics of a negotiable instrument that
the holder may sue on it in his own name. He may bring his
action against anyone or more of the prior parties. Whether his
action on the cheque will succeed will every often depend
upon whether he is a mere holder or a ‘holder in due course.’
Holder in Due Course

• The person may be holder in due course; the following conditions must be
• Consideration
• Before Maturity
• Notice of Defect in Transferor’s Title
• Complete and Regular Instrument
• Forged Endorsement

Therefore, every holder is not a holder in due course. A holder of a negotiable

instrument will not be a holder in due course, if:

• He has obtained the instrument by gift, or
• He has obtained the instrument for unlawful consideration, or
• He has obtained the instrument after its maturity, or
• He has obtained the instrument by some illegal method, or
• He has not obtained the instrument in good faith.
Rights and Privileges of a Holder in Due Course

• Indefeasible Title to the Instrument

• Right to Enforce Payment against Prior Parties
• Privilege against Inchoate Instruments
• Bills Drawn in Fictitious Names
Distinctions between Holder and Holder in
Due Course
On the Basis of Holder Holder in Due Course
Entitlements A holder is entitled in his own A holder in due course acquires the
name to the possession of the possession of the instrument for
Instrument. consideration.
Consideration Consideration is not necessary. The Consideration is necessary. A person
instrument may be given as a gift cannot be a holder in due course if he
or donation. has obtained the instrument without
Before and after A holder may get the instrument A holder in due course must get the
Maturity even after it has become payable. possession of the instrument before its
Presumption Every holder in due course is a Every holder may not be a holder in
holder. due course.
Privileges A holder does not enjoy any A holder in due course enjoys certain
special privileges. special privileges.